Author
Topic: 10 Year Bond Yields (Read 8933 times)

The idea here is that your foreign creditors do not have a choice in selling your bonds or not lend you money. In the past it you may have heard things like "oh what if china decides to not led the US money anymore". Basically China doesn't have a choice. They NEED to hold US bonds because they've ran trade surpluses with the US.

It's the same thing with Japan. Japan didn't finance their debt domestically by accident. Japan HAD to finance their debt domestically because for the most part they were running trade surpluses. This wasn't a problem for them because the Japanese have high savings and generally low propensities to consume.

In the US the numbers are large. But I don't think they'll have problems financing the deficit domestically. The situation is different from Japan. Americans have a high propensity to consume. But the deficits mainly come from tax policies that favor the rich which have low marginal propensities to consume. So you can picture it like this: the federal government gives a $100 tax cut to some guy who doesn't need anything. The government deficit goes up by $100. Then the guy uses his extra $100 to buy a government bond and that finances the deficit. So there won't really be a problem to finance the deficit domestically.

The real problem comes when deficit financing has to compete with consumption and investment that's when yields have to spike. But then the government can also raise taxes which lowers the deficit. Those can also lower consumption and eliminate the competition. Look at it this way, you will be hard pressed to find a government debt crisis in a country with a functioning economy that borrows in its own currency.

rbcan you explain for those without economics degree why when China runs trade surplus they need to buy T bills?thanks

rbcan you explain for those without economics degree why when China runs trade surplus they need to buy T bills?thanks

Like I said in a previous post, they don't need to buy/hold T bills but they need to buy some type of capital asset of yours.

It's not easy to explain/understand this stuff without econ concepts but I'll give it a shot. I saying this I'm not trying to be arrogant but because I'm afraid I'm going to do a poor job at explaining it. If need be, please feel free to ask follow up question. I'll do my best to answer them.

Ok here we go. Think of it like this. The reason that you have a trade surplus with me is because I consumed more than I produced. You supplied the goods I consumed in excess of my production. My production is my income. So I've spent more than I made. For our transactions to happen you either have to extend me credit or I have to dip into my savings to pay you - this means I have to hand you over a capital asset of mine. So if you run a trade deficit with me you have to accumulate my capital whether in terms of real assets or my debt. You don't have a choice.

To make this more complicated this ties into another macro aspect which is that the real source of trade surpluses is the savings rate. Basically the reason why you have a trade surplus with me is because you consumed less than you've produced and sold me the rest. This means you have positive savings because your production is your income and consumption your expenditure. This is also why you can lend me money to buy your goods. You're lending me your savings.

Interest rates are the cost of money insomuch as money represents earnings. Earnings are the result of productivity. If "money" has no intrinsic value then the cost of money is also intrinsically invaluable.

Where do you see a difference between cost of capital and cost of money?

Yes an increase in productivity results in lower rates. Less resources needed to produce the same output. This assumes "output" doesnt change. My theory is the rate of change in output has been declining, causing the relative increase of overall productivity, hence lower-than-"average" interest rates.

I'm sorry it's not semantics. Labour and capital are completely different things.

Money does not represent earnings.

Your last paragraph is both wrong and confusing. Why would output not change? Why would resources be left idle? That doesn't happen. Furthermore why would an increase in productivity lead to a decreasing rate of change in output? That's not how it goes. An increase in productivity leads to both and increase in output and lower rates.

Why would output not change? Technological stagnation. Incremental improvements are not as groundbreaking as previous improvements. Take automobiles or farming for example.

Why would resources be left idle? As a result of the above. We get so good at building a car, eventually that activity requires less and less resources. The hope is that idle resources are re-allocated elsewhere.

Furthermore why would an increase in productivity lead to a decreasing rate of change in output? Again, just the nature of technological improvements. Eventually the activity reaches a level of production right around the cost curve. Only when something truly disruptive emerges does that change.

An increase in productivity leads to both and increase in output and lower rates. To a certain point. The market got really great at churning out horse and buggys at one point

That doesn't happen. Furthermore why would an increase in productivity lead to a decreasing rate of change in output? That's not how it goes. An increase in productivity leads to both and increase in output and lower rates.

Why would output not change? Technological stagnation. Incremental improvements are not as groundbreaking as previous improvements. Take automobiles or farming for example.

Why would resources be left idle? As a result of the above. We get so good at building a car, eventually

Yes, we got really good at farming. We don't need a lot of farmers. But we don't have a huge bunch of idle farmers. Those people got to doing other things and we have higher output.